BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.184 of 2011
Date of Decision: 4.10.2012
Dushyant N. Dalal
Ms. Puloma D. Dalal
120/123, Arun Chambers,
First Floor, Tardeo Road,
Mumbai – 400 034.
…… Appellant Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
…… Respondent Mr. P.N. Modi, Advocate with Mr. Vinay Chauhan, Mr. Ranjeet Bhonsale and Mr. Anant
Upadhyay, Advocates for the Appellant.
Mr. Kumar Desai, Advocate with Mr. Mobin Shaikh, Advocates for the Respondent.
CORAM : P. K. Malhotra, Member & Presiding Officer (Offg.)
S.S.N. Moorthy, Member
Per : S.S.N. Moorthy
The adjudicating officer of the Securities and Exchange Board of India (for short
the Board) imposed a penalty of ` 14 crores on the appellant s, Dushyant Natwarlal Dalal
and Puloma Dalal, on June 2, 2011. The above penalty was imposed under section 15HA
of the Securities and Exchange Board of India Act, 1992 (the Act) for violating the
provisions of section 12A (a), (b) and (c) of the Act read with regulations 3 and 4 of the
Securities an d Exchange Board of India (Prohibition of Fraudulent and Unfair Trade
Practices Relating to Securities Market) Regulations, 2003 (referred to hereinafter as the
FUPT Regulations). The cause of action for the impugned adjudication order arose out
of the investigation conducted in the dealings in the shares of certain companies during
their Initial Public Offerings (IPOs) covering the period 2003 to 2005. The investigations
revealed that the appellants indulged in the unlawful act of cornering the shares of the
company acting as financiers to the key operators in the IPOs of a few entities, and in the
process, made unlawful gains at the cost of retail individual investor s. The unlawful
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gains were estimated to the tune of 4,94,19,379 and based on that the adjudicating officer imposed a penalty of 14 crores.
- The appellants are chartered accountants by profession and are actively engaged
in providing finances to various entities over a period of time. The appellant s provided
finance to market operators like Purshottam Budhwani (Budhwani), Sugandh Estates and
Investments Pvt. Ltd. (Sugnadh) etc. The IPOs related to companies like ILFS
Investments (ILFS), Infrastructure Development Finance Co. Ltd. (I DFCL), Sasken
Communication Technologies Ltd. (Sasken), Gateway Distriparks Ltd. (Gateway),
Provogue, MSP Steel, etc ., to mention a few of them. According to the appellant ,
finances were provided to the key operators in the form of loan, pure and simple , and
they had no control over the utilization of funds by the key operators. However, the
analysis of the transactions and refund of money to the appellants revealed more than
what was apparent and the Board conducted in depth investigation in the financial
dealings of the appellant vis -à-vis the key operators . The appellants were served with a
show cause notice on June 16, 2006 alleging violation of regulations 3 and 4 of the
FUTP Regulations and directed to show cause why enquiry should not be conducted and
penalty imposed under section 15HA of the Act if f ound guilty. A supplementary show
cause notice was issued on 18.1.2011. Penalty as mentioned hereinabove was imposed
on January 2, 2011. - We have heard Shri P.N. Modi, learned counsel for the appellants and Shri Kumar
Desai, learned counsel for the respondent Board. - At the outset , it has to be mentioned that the argument s on both the sides were
confined to the issue of non compliance with the principles of natural justice by the
adjudicating officer while passing the impugned order. In the present appellate order we
are confining ourselves to the above issue only and merits of the case are not considered. - The principal argument advanced by the appellant’s learned counsel is that the
respondent Board failed to appreciate that non disclosure of doc uments and refusal of
cross examination of witnesses whose statements/submissions/correspondence are relied
upon causes prejudice to the appellant and it is a clear denial of reasonable opportunity to
submitting effective rebuttal of the allegations. Acco rding to the appellant, the Board
ignored the settled legal position that an order exercising judicial or quasi judicial
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functions passed in violation of the principles of natural justice cannot be sustained. The
impugned order has been passed without providing the appellant opportunity for
inspection of documents, cross examination of parties whose statements are relied upon
and without providing effective opportunity to make submissions on the charges leveled.
- The appellants’ learned counsel submitt ed during the hearing of the appe al the
history of the events which culminated in the levy of penalty. According to the
appellant’s learned counsel the impugned order has been passed on the basis of the
material collected by the adjudicating officer and the evidence on record without
providing the appellant necessary opportunity, as promised, to rebut the allegations. The
supplementary show cause notice issued on 18.1.2011 expressly relied on the
communication of Suga ndh, Budhwani and Kakadia , but the request for cross
examination of Sugandh, Budhwani and Kakadia was turned down. Opportunity of
proper inspection of records was not provided to the appellants. In March 2011, the
appellants had certain genuine difficulties which were duly communicated to the
adjudicating officer and a reply was given to the appellants that a fresh date of hearing
and time for inspection of documents would be provided. According to the appellant this
was never granted by the adjudicating officer and the impugned order was passed taking
into account the material already on record. - The appellant’s learned counsel drew our attention to the provisions of section 15I
and 15HA of the Act and submitted that the proceedings imposing penalty are
independent quasi judicial proceedings which required proper application of mind by the
adjudicating officer and the present order does not conf orm to the above legal
requirements. - The learned counsel for the Board subm itted that there was no infirmity on the
part of the adjudicating officer with respect to compliance of the principles of natural
justice and so the impugned order cannot be regarded as bad in law from that point of
view. An affidavit in reply on behalf of the respondent has been filed justifying the stand
taken by the adjudicating officer. According to the Board, the appellants had taken full ,
free and complete inspection of all documents referred to and relied upon by it and no
prejudice is caused to the appellants by way of any failure on the part of the adjudicating
officer. T he appellant had been provided with information of various documents
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considered in the supplementary show cause notice and inspection was also conducted by
the appellant of the very same documents and no prejudice has been caused in this regard.
In fact, the appellants had taken too many adjournments contributing to further delay in
the proceedings. It is the case of the Board that investigation reports and all other
documents referred to or relied upon in the adjudication proceedings were provided to the
appellants. It is also submitted that statements of Budhwani , Sugandh and Kakadia as
sought by the appellant s were never recorded by the B oard but reliance has been placed
on the letters submitted by them. It is also argued that the submissions of Sugandh,
Budhwani and Smt. Nimisha Kadakia were relied on only in the form of corroborative
evidence for finance provided and refund received. It is also strenuously admit ted that
there is no need for cross examination of Budhwani and Kakadia since opportunity of
cross examination is not an essential element of natural justice but is a part of only
procedural justice and no prejudice has been caused to the appellants. With a reference to
the order passed by the whole time member under section 11B issuing directions to the
appellant and the order of disgorgement passed by the whole time member and the
confirmation of the same in appeal it is submitted that the fac ts and evidences considered
therein have been examined and found correct in those proceedings as well and so very
same facts relevant to the impugned order automatically stand confirmed.
- We have considered the rival submission s and have gone through the records of
the case. - Let us first examine the grievance regarding non compliance with the principles
of natural justice by the adjudicating officer. The order passed by the adjudicating
officer, being quasi judicial in natur e, has to necessarily observe the principles of natural
justice with a view to providing the appellant with all the documents and evidences relied
upon by him and for providing a reasonable opportunity to put up necessary defense
against the allegations. In the present case, the appellant’s grievance concerns lack of
opportunity to inspect relevant records, lack of opportunity to file a proper reply to the
allegations, lack of satisfactory personal hearing and lack of opportunity to cross
examine Budhwani and Kakadia. For a proper appreciation of the grievance of the
appellant it is necessary to refer to the correspondence between the appellant and the
adjudicating officer when the proceedings were on. The first show cause notice was
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issued to the appe llants on 16.6.2006. The appellants’ correspondence with the
respondent Board spanned over a considerable period of time from the issue of show
cause notice. A supplementary show cause notice was issued on 18.1.2011. There were
some deficiencies in the show cause notice issued on January 18, 2011 and so on January
25, 2011 the appellants corresponded with the Board for providing them with correct and
complete documents in respect of the show cause notice. On February 14, 2011 the
appellants sent a reque st to the Board to allow the m to have personal inspection of the
documents relied upon. A request was also made in the above letter for providing the
appellant with an opportunity t o cross examine Budhwani and Kakadia. The Board
permitted inspection of relevant documents/materials to be held on March 14, 2011.
Since the brother of one of the appellants who was depende nt on her had to undergo an
open heart surgery on March 14, 2011 a request was made for adjournment of the date of
inspection. The Board rescheduled the inspection to March 24, 2011. On March 23,
2011 the appellants sent an email to the Board requesting another date since one of the
appellants could not be present in Mumbai on the said date. It was the intention of the
appellants to take a joint inspection of the documents under consideration. On March 23,
2011 at 2:51 p.m. the appellant sent an email to the Board stating that he was awaiting
response to his emails rescheduling the date of inspection. Since no reply was
forthcoming another email was sent to the Board at 5:03 p.m., again referring to the
adjournment of the inspection and inability to talk over phone to the concerned officer
Mr. Biyani. On March 24, 2011 another email was sent to the Board which reads as
under:-
“This i s further to my telecon with Mr. Biyani this morning when, after
understanding the facts, he assured me that he would revert back after
talking with his colleagues.
I now look forward to a fresh date for inspection with sufficient notice”.
Subsequent to this there was no response from the Board. Admittedly, the appellant was
not given inspection of documents as promised. No response regarding the request for
cross examination was available.
- The facts mentioned hereinabove are on record and are not disputed. From the
request made by the appellant s which is part of the records it is clear that the appellants
wanted inspection of documents and cross examination of Budhwani and Kakadia. The
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Board was inclined to grant necessary opportunity for inspection and a decision regarding
cross examination of parties. The sequence of events narrated above shows that the
appellants were keenly following up with the Board and all efforts were made to
co-operate with the Board and request for adjournments was made only in exceptional
contingencies. The email s sent by the appellants from time to time on March 23, 2011
evidence that the appellant keenly wanted rescheduling of the date of inspection and
efforts were made time and again to contact the Board and obtain a convenient date. The
email of March 24, 2011 shows that the appellants were under a bonafide impression that
rescheduling of inspection would be done as promised by the officer of the Board.
- It is necessary to see how the adjudication officer has reacted to the above request
and proceeded with the finalization of the order on the basis of the available records and
material as set out in the impugned order:
“I have noted from the available records that since the initiation of
proceedings the Noticees were provided atleast seven opportunities of
personal hearings respectively on August 28, 2006, September 20, 2006,
February 02, 2007, February 27, 2007, March 02, 2007, January 28, 20 10
and February 23, 2011 and atleast five opportunities of inspection of
documents of February 11, 2010, April 05, 2010, May 04, 2010,
March 14, 2011, and March 24, 2011. I have also noted the lack of
seriousness of the Noticees about the proceedings and fulfilling the
requirements. Despite clearly advising them to furnish copy of their PAN
cards in various comminuques (viz. letter dated January 17, 2008, July 17,
2009, February 08, 2011) they have not complied with the same and so far
it has not been provided to the undersigned in the matter of instant
adjudication proceedings.
Going by the above stated facts, I am of firm opinion that the Noticees are
making deliberate attempts to delay the proceedings. I a m also of firm
opinion that the relevant documents relied upon in support of the
allegations against the Noticees have already been provided to them. I
have further noted with concern that the show cause notice in this case
alleges an unprecedented scale o f fraud. Further, this IPO scam in which
the Noticees are alleged to have played a key role, ha d a devastating
impact on securities market and has caused loss of lakhs of investors. I
am, therefore, of the view that it would cause prejudice to interests of the
investors if the present proceedings are delayed any further. Therefore, in
the facts and circumstances of the case, I proceed with the matter on the
basis of the information/material and the submissions of the Noticees,
which are available on record.” - From the impugned order it is clear that a final conclusion was drawn on the basis
of information/material and submissions of the appellants which are available on record.
There is no mention about the specific request for rescheduling of inspection made by the
appellants and the correspondence with the Board that it would revert to the appellants in
reply to the request for adjournment. In view of the specific facts narrated above , it is
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clear that the appellants were not provided with an oppor tunity for inspection of
documents and consideration of the request for cross examination of parties. In the facts
of the case we cannot agree with the submissions of the Board that the adjudicating
officer has offered full, free and complete inspection o f all documents referred to and
relied upon by him. We cannot appreciate the stand of the Board that the appellants have
failed and neglect ed to avail of opportunities and cannot now complain of breach of
natural justice.
- The learned counsel for the B oard very strenuously argued that general cross
examination is not part of natural justice but part of procedural justice. A reference was
made to the judgment of High Court of Calcutta in Haripada Moitra vs President,
Calcutta Improvement Tribunal, [AIR 1970 C al.154]. However , on a perusal of the
judgment it is seen that the present case cannot be held parallel to the facts available in
that case. In the said judgment it is made clear that the petitioner refused to participate in
the enquiry and the met hods adopted by the petitioner clearly show that he was
determined not to participate in the enquiry by the opposite party. However , in the
present case there was no such non co-operation. On the other hand, the appellants had
repeatedly informed the Boa rd about their personal inconvenience and sought time very
meticulously for investigation and cross examination of parties. Since every case is to be
judged in the facts and circumstances of that case, we cannot hold the view that denial of
inspection sought for by the appellant can be brushed aside on the ground of lack of
prejudice or conclusion based on facts already considered in other orders relating to the
appellants issued by the whole time member. - Another important objection raised by the appel lant in the present appeal is that
adjudication proceedings have been finalized without proper application of mind and
without proper appreciation of the provisions of section 15I of the Act. According to the
appellants’ learned counsel , adjudication proceedings are separate and independent
proceedings which require the delinquent to be provided with a reasonable opportunity of
being heard for the purpose of imposing any penalty. It is submitted that the impugned
order has been passed wi thout observing the statutory re quirement laid down in section
15I of the Act. On a consideration of the provisions of the Act and the observations in
the adjudication order and the affidavit in reply filed by the Board, we are of the view
8
that the proceedings have not been treated as independent proceedings as envisaged. This
aspect is significant in two respects, namely, application of mind of the adjudication
officer and the compliance with the principles of natural justice. Even though the B oard
is empowered to conduct parallel proceedings in respect o f a delinquent with regard to a
single offence , the proceedings are separate and independent. It does not f ollow as a
natural corollary that a delinquent can be punished in adjudication proceedings beca use
certain directions have been issued against him under section 11 and 11B of the Act
which have acquired finality. In this respect , it is necessary to refer to the relevant
provisions of sections 15HA and 15I of the Act which are pertinent to the issue
considered in the impugned order. For the sake of convenience , the above provisions of
the Act are extracted below:-
“15HA.Penalty for fraudulent and unfair trade practices. – If any person
indulges in fraudulent and unfair trade practices relating to securities, he shall
be liable to a penalty of twenty- five crore rupees or three times the amount of
profits made out of such practices, whichever is higher
.……………………………
……………………………
15I.Power to adjudicate.- (1) For the purpose of adjudging under sections
15A, 15B, 15C, 15D, 15E, 15F, 15G, 15H, 15HA and 15HB ,the Board shall
appoint any of its officers not below the rank of a Division Chief to be an
adjudicating officer for holding an inquiry in the prescribed manner after
giving any person concerned a reasonable opportunity of being heard for the
purpose of imposing any penalty.
(2) While holding an inquiry, the adjudicating officer shall have power to
summon and enforce the attendan ce of any person acquainted with the facts
and circumstances of the case to give evidence or to produce any document
which in the opinion of the adjudicating officer, may be useful for or relevant
to the subject matter of the inquiry and if, on such inquir y, he is satisfied that
the person has failed to comply with the provisions of any of the sections
specified in sub -section (1), he may impose such penalty as he thinks fit in
accordance with the provisions of any of those sections.”
Section 15HA deals with the penalty for fraudulent and unfair trade practices and this
obviously takes us to regulations contained in FUTP Regulations. FUTP Regulations, the
investigation procedure set out therein and the penal provisions contained in sec tion
15HA and 15I are composite provisions which have to be implemented as laid down
therein. In short, the adjudication proceedings for FUTP violation which is the subject
matter of the present appeal are independent and so they should stand on their own
factual and legal foundation.
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- In the affidavit in reply filed by the respondent Board heavy reliance is placed on
the directions issued by the whole time member under section 11 and 11B of the Act and
the disgorgement order passed against the appellan t. It is submitted that the above two
orders have attained finality in appellate proceedings and points of facts and law have
become final and binding on the appellant and the Board. As a consequence , the
materials and documents which f ormed the basis of the show cause notice in the present
case are the same and the appellants had ample opportunity on the earlier occasion to take
a full and complete inspection of the documents and verification of the facts contained
therein. It is further submitted that the whole time member’s order, having been
confirmed by the Hon’ ble Supreme Court and the facts as contained therein hav ing been
examined not only at the level of the Board but also at the level of the Tribunal and the
Supreme Court the appellants cannot raise any grievance now. The tone and tenor of the
submissions of the respondent Board is to the effect that all the statutory requirements
have been complied with in the orders of the whole time member and the guilt of the
appellants stands finally established. - The learned counsel for the Board made reference to a host of decisions holding
the view that the order of the whole time member on identical wrong doing has attained
finality. The following decisions of the Hon’bl e Supreme Court are relied upon (1)
Aligarh Muslim University and Ors. vs. Mansoor Ali Khan [(2000) 7 SCC 529 ]
(2) Thakore Sobhag Singh vs. Thakur Jai Singh and Ors. AIR 1968 SC 1328 State
of West Bengal vs. Hemant Kumar Bhattacharjee and Ors. [AIR 1966 SC 1061] and (4)
Haryana Financial Corporation and Anr. Vs. Kailash Cahndra Ahuja [(2008) 9 SCC 31]. - A perusal of the above mentioned orders reveals that they apply mainly to inter
party disputes. The principles of res judicata are considered in detail in those orders.
They relate mainly to cases w here one consequence/claim flows from another
suit/proceedings relating to the same case. In the present case, the legal position is
different. - The Board has been authorized to conduct multiple proceedings in respect of a
wrong doing in a parallel manner. But each proceeding is independent by itself and a
competent authority has to come to a well reasoned out conclusion after proper
application of mind to the facts and legal issues. It cannot be held that the consequences
10
in one of the proceedings can be automatically followed in other proceedings without
observing the statutory requirements laid down in respect of the separate proceedings. In
fact, the decision of the Hon’ble Supreme Court in Sri T. Ashok Pai vs. Commissioner of
Income Tax, Bangalore [ 292 ITR 11] , lays down the legal principle in a very clear
manner. It has been held therein that penalty proceedings must be considered to be
different from proceedings relating to quantum of income since the burden of proo f in
penalty proceedings is different.
“18. The order imposing penalty is quasi -criminal in nature and, thus,
burden lies on the department to establish that the assessee had concealed
his income. Since burden of proof in penalty proceedings varies from that in
the assessment proceeding, a finding in an assessment proceeding that a
particular rec eipt is income cannot automatically be adopted, though a
finding in the assessment proceeding constitute good evidence in the penalty
proceeding. In the penalty proceedings, thus, the authorities must consider
the matter afresh as the question has to be co nsidered from a different
angle.”
- This Tribunal, in the case of Dilip S. Pendse vs. Securities and Exchange Board of
India, [Appeal no.90 of 2007 dated November 20, 2008] has considered the separate and
independent chara cter of adjudication proceedings and held that the finding in
adjudication proceedings cannot be mixed up with the result of an enquiry under section
11 of the Act. “Every finding of the adjudicating officer must be passed on an
independent appraisal of evidence on record and cannot be allowed to be influenced by
extraneous factors. For the same reason , we do not appreciate the adjudicating officer’s
reference to the appellant being penalized for the same alleged mischief in an enquiry
under section 11 of the Act………….” - The above decision would show that the attempt of the learned counsel for the
respondent Board that the adjudication order should be viewed in the backdrop of the
orders of the whole time member which have attained a finality and so all statutory
requirements should be considered to have been complied with cannot be accepted. - We have discussed at length the factual matrix of the case relat ing to denial of
proper opportunity of inspection of records to the appellants in the previous paragraphs.
The le gal position set out in the previous paragraphs would also illustrate that
independent evaluation of evidence by providing statutory opportunities to the appellants
is lacking in the present case and this has affected application of mind of the adjudicatin g
officer independently to the facts of the case.
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In view of the discussion above, we set aside the impugned order, remand the case
to the adjudicating officer for fresh consideration as per law the request the appellants to
inspect records which are rele vant and being relied upon and also to cross examine
Budhwani and Kakadia. During the hearing of the appeal a reference has been made to a
few documents annexed to the supplementary show cause notice which are s aid to be
new. According to the appellant, it is necessary to inspect the new documents annexed to
the supplementary show cause notice. The adjudicating officer may consider the
relevance of these documents and if they are found to be relied upon this request may be
considered as per law . The appellant is directed to fully co -operate with the Board and
avail of the earliest opportunities for speedy finalization of the adjudication proceedings.
The Board is directed to pass orders expeditiously since the appeal relates to an old
matter. We may make it clear that we are not expressing any view on the merits of the
case.
The appeal stands disposed of as above. No costs.
Sd/-
P.K. Malhotra
Member &
Presiding Officer (Offg.)
Sd/- S.S.N. Moorthy
Member
4.10.2012
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